Understanding the legal framework governing preservation funds

Preservation funds can be a key part of a retirement savings plan for employees who have been lucky enough to have an employer-linked pension or provident fund. During job changes, you can transfer your pension or provident fund across to a preservation fund, maintaining the investment for retirement.  

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A preservation fund allows invested capital to potentially continue growing, as was the case while your savings were invested in your pension or provident fund. Preservation funds offer some flexibility to investors, but they are also strictly regulated. These regulations are in place to help protect South Africans’ long-term savings.  

10X simplifies your retirement with low fees, a superior track record and a straightforward investment approach. In this article, we will cover all the regulations governing preservation funds in South Africa, including the legalities regarding withdrawals and investment limits.  

What is a preservation fund? 

A preservation fund allows you to preserve your hard-earned savings when moving jobs. These are the savings that have accumulated in either your pension or provident fund over time. Your savings can be transferred across to a preservation fund without triggering a tax event. You must ensure that your pension fund is transferred to a pension-preservation fund and your provident fund is transferred to a provident-preservation fund to avoid triggering a tax liability.   

A service provider then invests the savings on your behalf into selected underlying funds which suit your investor profile. It is a tax-efficient retirement savings vehicle which allows for further growth of your savings when returns potentially compound over time. Keep in mind that preservation funds do not allow for any further contributions, so choosing the right provider goes a long way to fuelling the potential growth of your capital over the long term.  

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Growth within the fund is tax-free, which allows for more of your returns to be reinvested and allowed to potentially grow and compound over time. Preservation funds are regulated by the Pension Fund Act and also overseen by SARS and the FSCA. Let’s take a deeper look at the key legal provisions surrounding preservation funds.  

Key legal provisions governing preservation funds 

Preservation funds in South Africa are subject to a range of legal and regulatory frameworks designed to protect savings. Understanding the legal landscape surrounding preservation funds is key for anyone with savings invested. Let’s have a look at the key regulations: 

The Pension Funds Act: The Pension Funds Act is the cornerstone of retirement regulations in South Africa. The act governs the registration, management and administration of pension and preservation funds. The act aims to make sure retirement funds are properly managed and that fund members' interests are protected.  

Regulation 28 of the Pension Funds Act: Regulation 28 limits the kind and proportion of asset classes that retirement funds, including preservation funds, may invest in. This is to protect the investor from a poorly-diversified portfolio and to avoid excessive risk. The aim is to reduce the risk of overexposure to any single asset class, promoting diversification and long-term financial stability. 

FSCA guidelines: The Financial Sector Conduct Authority (FSCA) is a regulatory body that oversees financial institutions, including retirement funds, and ensures that members are treated fairly and correctly. The FSCA provides guidelines to maintain transparency, ethical conduct and the fair treatment of fund members. 

SARS directives: Whenever you withdraw from a preservation fund, it is important to follow SARS tax directive procedures. The directives are used to calculate the correct amount of tax payable on a withdrawal.  

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The Two-Pot Retirement System: How it may impact preservation funds  

The Two-Pot Retirement was introduced by the National Treasury in September 2024. This changed the way preservation fund withdrawals are governed. With the new system, all contributions are split between the ‘savings’ and ‘retirement pot’. One third of contributions will go to the ‘savings pot’ and two thirds to the ‘retirement pot’.   

Withdrawals are allowed from the savings pot once per year for a minimum amount of R2000. Generally, withdrawals from the savings pot should be for emergencies only. Your withdrawals are taxed at your marginal tax rate. The retirement pot savings remain invested until retirement age, which is currently age 55 in South Africa, meaning none of the money in the retirement pot can be withdrawn.  

Remember, contributions to a preservation fund are not permitted. The savings component of the preservation fund will, however, grow at the same rate as the total fund. If the total fund grows by double the size, both the savings pot and the retirement pot will also grow by double the size.   

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All savings and contributions made prior to September 2024 will form the ‘vested pot’. This pot is governed by the old rules. If you had capital in a preservation fund before September 2024, then your savings pot would have been seeded with 10% of your vested pot (up to a limit of R30,000) to allow some access to those funds.  Please consult the latest FSCA guidance for the most up-to-date information on the Two-Pot Retirement System. 

Withdrawal rules and legal limits 

As an investor, you are allowed one withdrawal from the vested portion of your preservation fund before retirement. Early withdrawals are highly taxed per the SARS withdrawal tables and allow for only R27,500 to be withdrawn tax-free. Therefore, because of taxation and the loss of potential retirement income, early withdrawals should generally be avoided, if possible.  

At retirement, up to one-third of your preservation fund may be taken in cash, while the remaining two-thirds must purchase a living annuity or a life/guaranteed annuity. This decision has long-term implications for your retirement income, so it should be made with careful planning.   

If you are emigrating, you will need to adhere to the new regulations which were introduced in March 2021. The ‘3 year rule’ is now in place. There are two steps which need to be completed before you can withdraw your preservation fund or retirement funds in such a scenario. These are:  

1. You must no longer be a South African tax resident, and you need to have notified SARS thereof. 
2. You must not have lived in the country for the last 3 years or more.  

 Withdrawal rules and tax implications are subject to change, so it’s important to always stay up to date with the latest legislation.  

Regulation 28 and investment constraints 

Regulation 28 of the Pension Fund Act was implemented to help investors avoid poor diversification of retirement savings. It limits the amount of certain asset classes which an investor may invest in. Current regulations state that you can invest a maximum of 45% of your retirement money offshore and 75% of your retirement funds in equities. 

 As an investor with 10X, you can choose from a selection of carefully curated funds. Each fund has a different asset allocation and is geared towards different investor types. A fund generally includes a mix of equities, bonds, real estate (property) and cash according to your investor profile, investment goals and timeline.  Each of the different asset classes has different pros and cons. Equities have the potential to generate the best returns, although they are the most volatile of the asset classes. Bonds are more stable but may generate lower returns. Real estate may also generate some good returns and offer a good hedge against inflation. Cash is the most stable and liquid of the asset classes but likely to generate the lowest returns.   

For example, we see that equities have historically produced returns above inflation by around 7% annually over the long term (based on JSE All Share Index performance versus CPI from 1960-2020), however, past performance does not guarantee future results. Diversifying across the different asset classes as well as offshore allows for the investor to take advantage of gains that may occur in certain asset classes and locations as well as to mitigate against any losses which may occur in other asset classes or regions. When structuring your portfolio, you will need to ensure that you adhere to Regulation 28.   

10X offers a range of Regulation 28-compliant funds within the preservation fund wrapper. Each of these funds has been carefully chosen to match different investor profiles, so there is sure to be a fund which will meet your needs. To find out more about our funds on offer, follow this link.  

Legal treatment of a preservation fund upon death  

Section 37 of the Pension Fund Act governs how retirement funds, such as preservation funds, are allocated upon the death of the member. Therefore, your will is not the only determining factor in who will receive funds from a death benefit claim from a preservation fund.   

The fund’s trustees have to look at all dependents, including financial dependents and nominated beneficiaries, in order to make a fair as possible decision that is in line with the Act. The beneficiary who receives the death benefit may choose how they would like to receive the benefit. They may receive:  

• a lump sum benefit paid out to them in cash 
• access to the funds, which are then used to purchase a life or living annuity or, 
• access to the funds, which are used to purchase a life or living annuity and to receive a cash lump sum amount. 

If a cash lump sum benefit is selected, this will be taxed according to the retirement tax tables, which allows for the first R550,000 to be tax-free. Savings used to purchase a life or living annuity will not be taxed. On the other hand, income received from the life or living annuity will be taxed according to the personal income tax tables published by SARS.  

The importance of understanding your fees and EAC 

An important part of managing and understanding all the components of your preservation fund is to ensure that you are aware of the fees and costs being charged on your preservation fund. Higher fees have the effect of reducing the returns that you have available to reinvest and potentially compound over time. Lower fees may mean that you have more potential returns to compound and grow over the long term. Ideally, you would aim to minimise fees to maximise the growth of your preservation fund over time. 

The Effective Annual Cost (EAC) of your investment refers to the total fees and costs of owning an investment product over a one-year period of time. It is a standardised metric which ASISA introduced in 2015. Included in the EAC, you will typically expect to see the following fees: 

Administration fees: These are the fees charged for the administration of the fund. These could be costs such as those related to tax and compliance. 

Advisor fees: These are the fees charged by an advisor for their services. 

Management fees: These are the fees charged for the management of the fund. 

Others: These may be costs such as early withdrawal costs.  

All factors being equal, a higher EAC may mean less returns available to be reinvested, while a lower EAC may mean that there are more returns to be invested and allowed to potentially grow over time. Of course, EAC would just be one factor to consider when evaluating service providers. 

Based on a 40-year investment horizon, research indicates that a 0.5% increase in fees can potentially reduce your retirement amount by approximately 20%, assuming all other factors remain consistent. This is based on the compounding effect of fees over time. Note that this example is for illustrative purposes only and actual results may vary. You can learn more about the importance of fees here.  

10X charges low and transparent fees, which are less than 1% on most retirement products. This does depend on the product chosen and the amount invested. Please visit the 10X website to find the most up-to-date fee information. 

Conclusion: the legalities of preservation funds  

Preservation funds are a tax-efficient means of protecting and growing your savings over time, to provide for your retirement years. They do offer some flexibility, but certain regulations in place govern how they operate.  

These regulations are designed to protect investors. Navigating the legal framework requires a clear understanding of the legislation governing withdrawals, taxation and investment constraints under Regulation 28. 

A preservation fund can be a vital component of your retirement plan, provided it is managed correctly. Get in touch with 10X today for a transparent low-free preservation fund solution backed by a proven investment strategy!